Question

HJJ16CILJ Contribution Margin and Break-Even Analysis These problem solutions are due on November 4. Please bring your solutions to class for discussion and to be turned in. Chapter 10 in your text has section on BE analysis and contribution margin. 1. A company is contemplating a new project with expected first year results of as follows: - Sales Revenue $300,000 - Variable Costs of $100,000 - Fixed Costs of $50,000 10,000 units produced and sold Compute the contribution margin percentage and break-even point in units sold 2. The AAA Corporation has break-even sales of $500,000 and fixed costs of $250,000. Compute the selling price per unit if unit variable costs are $15. What is the contribution margin percent?

Answer 1

Answer:

1]

Sales revenue is $300,000

Variable Cost is $100,000

Fixed Cost is $50,000

Number of units produced is 10,000

A]

Contribution margin percentage:

1 – [Variable Cost /Sales Revenue]

= 1 – [100,000 / 300,000]

= 1- 0.33 = 0.67

Hence the contribution margin percentage is 0.67 or 67%(approx.)

B]

Breakeven Point: [Fixed Cost / (Per unit price – Per unit variable Cost)]

Per unit VC(v) = 100,000 / 10,000 = $10

Per unit selling price(s) = 300,000 / 10,000 = $30

BEP = FC / ( s - v) = 50,000 / (30 - 10) = 2500 units

2]

Given:

Break-even Sales = $500,000

Fixed Cost = $250,000

Unit variable cost = $15

Let, s = selling price per unit

BES = [FC / (s - v)] * s

500,000 = [250,000 / (s - 15)] * s

500,000(s - 15) = 250,000s

500,000s - 7,500,000 = 250,000s

250,000s = 7,500,000

s = 7,500,000 / 250,000 = $30 (Selling price per unit)

Contribution Margin = s - v = $30 - $15 = $15

Contribution Margin % = (15 / 30) * 100 = 50%